The 2nd U.S. Circuit Court of Appeals on Thursday reversed a June 2010 lower court ruling in favor of YouTube, which had been considered a landmark in setting guidelines for websites to use content uploaded by users.

"It's hard to characterize this as anything other than a loss for Google, and potentially a significant one," said Eric Goldman, director of the High Tech Law Institute at Santa Clara University School of Law. "It has given new life to a case that Google thought was dead."

The $1 billion lawsuit filed by Viacom in 2007 to stop the posting of clips from "The Daily Show with Jon Stewart," "South Park," "SpongeBob SquarePants" and other programs addressed a crucial issue for media companies: how to win Internet viewers without ceding control of TV shows, movies and music.

It was seen as a test of the Digital Millennium Copyright Act, a 1998 federal law making it illegal to produce technology to circumvent anti-piracy measures, and limiting liability of online service providers for copyright infringement by users.

In his June 2010 ruling, U.S. District Judge Louis Stanton in Manhattan said YouTube could not be liable simply for having a "general awareness" that videos might be posted illegally, and that it need not monitor for such activity.

But writing for a two-judge panel of the 2nd Circuit, Judge Jose Cabranes concluded that "a reasonable jury could find that YouTube had actual knowledge or awareness of specific infringing activity on its website."

The plaintiffs had accused YouTube of broadcasting about 79,000 copyrighted videos on its website between 2005 and 2008.

A YouTube spokeswoman said in an e-mailed statement: "All that is left of the Viacom lawsuit that began as a wholesale attack on YouTube is a dispute over a tiny percentage of videos long ago removed from YouTube. Nothing in this decision impacts the way YouTube is operating."

Viacom, in a statement, said the appeals court "delivered a definitive, common sense message to YouTube: intentionally ignoring theft is not protected by the law."

Other plaintiffs also welcomed the decision.

"Needless to say, my clients are delighted," said Charles Sims, a lawyer for the Premier League, the English soccer league, and several other plaintiffs. "YouTube willfully blinded itself to specific infringement and had ample ability to control infringing activity within the meaning of the copyright law."

The 2nd Circuit agreed with Stanton that "actual knowledge or awareness of facts or circumstances that indicate specific and identifiable instances of infringement" should keep YouTube from invoking "safe harbor" provisions of the copyright law.

But the appeals court said it was unclear whether YouTube had "red flag awareness" of specific infringement. It said the lower court should consider whether YouTube showed "willful blindness" in letting copyrighted videos remain on its website.

The 2nd Circuit quoted an e-mail exchange on Aug. 9, 2005, six months after YouTube's founding, in which co-founder Chad Hurley urged diligence about removing copyrighted content, but met resistance to taking down a CNN clip of a space shuttle.

Goldman said the decision could add to the costs of online service providers, even small ones, to keep websites running.

"It is not easy for a well-meaning company to establish it is protected under the safe harbor part of the copyright law, even if its service adds significant social value," he said.

"Even start-up companies will need sophisticated legal counsel from day one," Goldman continued. "It will make start-ups more hair-trigger on taking down news or content, for fear that failure to do so will be held against them by content providers."

The 2nd Circuit normally hears cases in three-judge panels. The third judge on the YouTube case died while the case was pending.

In afternoon trading on the Nasdaq, Google shares fell $2.86 to $632.29, while Viacom rose 81 cents to $47.21.

The cases are Viacom International Inc et al v. YouTube Inc et al, 2nd U.S. Circuit Court of Appeals, No. 10-3270; and The Football Association Premier League Ltd et al v. YouTube Inc in the same court, No. 10-3342.